Introductory home loans have a discounted rate at the start of the mortgage. Put more money in your pocket to ease the financial burden of home ownership.
Buying a home is an expensive process. In addition to the mortgage, there’s things like council rates, moving expenses and furnishings. And even after someone’s settled into their new home, there’s generally a list of things that need to be done that can take serious time and money. It’s no surprise then, that honeymoon loans are an attractive option for first home buyers.
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What is an introductory home loan?
Introductory rate home loans are designed with first home buyers in mind. They offer a low rate of interest for a special promotional period (normally about a year), which helps keep your payments down. It’s not unusual for this low rate to be a whole percentage point below the standard rate.
Borrowers can also take out a standard honeymoon mortgage with a lower introductory interest rate to reduce their financial pressure in the early years of owning their own home. This is also why honeymoon loans are popular with first home buyers, as they are typically young, and just starting out their career, as a result they are earning a relatively low income – compared to what they could be earning in 20 years – and an introductory interest rate gives them a foot in the door, a chance to build their own life in their own home, and of course the ongoing benefit of future capital growth in their property’s value.
The idea is to help new home buyers through the first year of home ownership as it’s the first year which normally proves the most difficult and expensive. Once the honeymoon rate period is over, the interest rate reverts to the product’s standard variable rate. In some cases lenders allow you to fix your new rate, but not all will, so you need to check with your mortgage broker before you commit to anything.
Many lenders offer this type of loan
There are plenty of different home loans available, but until the honeymoon home loan there wasn’t really a product aimed specifically at first time buyers. Lenders have realised how popular this type of low rate loan is, and you’ll now find most lenders with one on offer.
How long you receive your special low rate, what that rate is, and the rate you revert back to when the promotional period is over varies from lender to lender so you need to shop around. Have a look at what’s available and compare as many offers as you can. Also check our introductory home loan calculator to see what effect a lower rate in the first years of the mortgage means for your wallet.
Honeymoon home loan calculator
Comparing introductory loans
Are honeymoon rates the best choice for you?
The most attractive feature of a honeymoon loan is of course its low introductory rate, but before you choose your new home loan, consider the different ways you can save interest in the first years of your mortgage.
Some lenders will offer a tracking loan as a honeymoon mortgage, usually for an introductory period of one to two years. A tracking loan can take one of two forms:
- Tracking the RBA. In the first instance your honeymoon rate may be tied to the official interest rate of the Reserve Bank of Australia (RBA) and goes up or down when the Reserve Bank Board makes an adjustment. In this way your home loan rate is tied directly to the state of the current economy and your finances will reflect the trend of the national financial trends.
- Tracking other banks. Your lender may set a panel of other banks, usually the big four banks, and then offer you a rate which is one to two percent lower than their interest rates. You will then know you are getting one of the lowest interest rates, and you are still in line with interest rate movements.
The beauty of an interest-only introductory loan is the fact that you can make additional repayments above the minimum amount due. The additional repayments you make at the beginning of your loan will have the most significant benefit because you are lowering your principal loan amount and reducing the amount of interest you will pay over the life of the loan. If you can afford to make additional repayments of any amount during your loan term, you will reap the benefits as long as the lender doesn’t apply any fees to your additional repayments. If you would like to see what effect additional repayments have on your mortgage, check our extra repayment calculator.
A match made in heaven?
Honeymoon rate loans save you a lot of money during the promotional period. The great thing is you can make longer term savings if you know what you’re doing, as first time buyers James and Lucy found out.
James and Lucy decided to choose a honeymoon rate loan to finance the purchase of their first home. For the first year of the loan their interest rate was a competitive 5.25%. After the first year the interest rate would revert back to the products standard variable rate of 6.25%.
During their first year James and Lucy decided to make repayments based on the standard variable rate of interest, rather than the special low rate of 6.25%. Whilst it seems they missed out on the chance to save some money, they’ve actually done much more than that. They’ve prepared themselves for the standard variable rate of the loan, and by making overpayments they’ve also reduced what they owe. This means they’ll be paying less in interest, and can look forward to lower repayments.
James and Lucy have continued making overpayments on their loan, and this is saving them vast amounts of money over the life of their loan. Although this is the best way of using this product, you could use the lower monthly repayments during the promotional period to pay for other necessities such as repairs or furniture.
Feature Perfect
Features Of introductory honeymoon rates on home loans
Honeymoon loans are not just aimed at first home buyers. You can choose a honeymoon rate on your first, second or third home or even your investment property. First though you will need to consider whether the other features of an introductory home loan rate suit you:
- A honeymoon rate is usually the lowest you'll find anywhere. An introductory honeymoon rate is going to look very competitive when you compare it to the standard interest rates offered on other loans, even on the other loans from the same provider. However a honeymoon rate is so low because it is for a limited time. Common honeymoon periods are 12 months, but some may be as short as six months and others can be longer, up to three to four years.
- A fixed discount honeymoon rate option. This is one type of introductory interest-rate you may find on a honeymoon home loan. The interest rate on the loan will be variable, but will be fixed at a certain discount level below the bank's standard variable rate. Therefore while you're interest-rate will move with the market during the introductory period, it will remain discounted.
- Extra repayments may be capped during the honeymoon period. Making additional repayments to your home loan makes good financial sense; however, some home loan lenders will cap the amount or value of additional repayments you can make during the introductory period.
- You are likely to pay exit fees if you refinance during the introductory period. There are likely to be substantial exit fees if you pay out your loan or refinance during the honeymoon period. This means that you can't follow introductory home loan interest rate offers from one lender to another.
- The interest rate will revert to the lender's standard variable rate. A standard variable rate is usually one of the highest rates on offer from a lender so compare both honeymoon rates and the standard revert rate and weigh up how much the mortgage will cost you at the end of the introductory period.
Benefits of introductory loans
The biggest advantage of honeymoon rate loans is they allow to you reduce your debt substantially without having to break your budget. By making repayments as if you’re paying the lenders standard variable rate you’re paying no more than you will be after the low rate period, and those extra payments are gradually reducing the principle of the loan. Obviously the knock on effect is you’ll also be paying less back in interest, and can get the debt cleared earlier than planned. If you wanted to use the spare cash differently you could also put it into a separate account to use as an emergency fund. That way you’re prepared financially if something went wrong in the future.
Disadvantages of introductory loans
There are very few disadvantages to this type of loan. The only real sticking point is that most lenders will charge you some sort of penalty if you refinance or repay the loan early within the first few years of the deal. Ideally you’ll want to keep the loan for a little longer if you want to avoid these fees, or any savings you’ve made during the low rate period will be wiped out. The rules around how this works vary from provider to provider, so it’s important that you check the terms and conditions carefully when deciding whether this loan is right for you.
And when the honeymoon is over?
If your honeymoon mortgage allows you to make additional repayments, you can pay the standard repayment (not the lower introductory repayment amount, but the amount your repayments will revert to at the end of the introductory period) during the honeymoon period. This will help you reduce the principal amount owing on your home loan while also preparing you financially for when the honeymoon is over.
Australian lenders are able to offer a lower introductory interest rate because they know that home loans are a long term investment. As a result, the lender is willing to make a smaller profit in the beginning because they know they will be able to make up for that loss of interest during the remainder of the mortgage. However, unluckily for the lender, it has never been easier for mortgage holders to seek out and take advantage of a better home loan deal, especially since the Australian Government abolished home loan exit fees on mortgages taken out after 1 July 2011.
There’s an anecdote of a lawyer in the United States also became quite well known for his practice of switching loans whenever his lender’s honeymoon period expired, and taking up another loan offering a new honeymoon period. He argued that the cost of doing so was worth his time economically. Not all of us would be willing to take it that far but it is something to keep in mind if your lender doesn’t come to the party with their best offer.
In addition to some lenders not allowing you to make additional repayments during your honeymoon, others will hit you with a high standard interest rate when the honeymoon is over. If you’re not feeling the love from your lender when the honeymoon ends, look for one of the many lenders who won’t target you with a high ongoing interest rate – it will be worth your while to shop around too, because remember, the most common cause of marriage breakdown is financial stress, so take some time to find the best relationship all round.
There is no need to feel remorse at walking out once the honeymoon is over, as the financial industry has been encouraging you to shop around for the best deal for years. For example, credit card providers heavily market their balance transfer credit cards to entice you to their product, while sweetening the deal with an introductory low interest rate – sound familiar?
While you don’t have to go honeymoon-hopping to the extent of the American lawyer, it certainly pays to read and understand the fine print and terms of a honeymoon mortgage so that you can decide whether you want to stick around after the romance has ebbed.
Introductory or honeymoon loan common issues
While many lenders will offer an introductory discounted interest rate, you also need to be sure that the entire loan suits your needs once the honeymoon period is over.
You may be suited to a honeymoon loan if you answer yes to one or more of these.
Have you just saved up a large deposit?
Getting a deposit together is just one of the hurdles of getting a new home loan, because once you alone has settled and then activated you now need to be able to service the repayments. If you don't have a lot of spare cash and don't want to be spending a lot on your loan as you try and rebuild your savings, an introductory low interest rate and lower repayments can suit you.
Have you just saved up a large deposit?
Getting a deposit together is just one of the hurdles of getting a new home loan, because once you alone has settled and then activated you now need to be able to service the repayments. If you don't have a lot of spare cash and don't want to be spending a lot on your loan as you try and rebuild your savings, an introductory low interest rate and lower repayments can suit you.
Is this is your first home loan and you want to adjust to the system?.
While you may have had personal loans or credit cards in the past repaying a home loan is a completely different situation. With a honeymoon loan you can ease into what is required of you as a mortgage holder, with a little spare room in your repayments to start with.
Are you able to pay more and get ahead?
If you have the spare cash to make repayments at the standard amount they will be when you're interest-rate reverts to the standard variable rate, you can get ahead during the first year of your home loan by paying extra. Just make sure that you have a spare cash available for these extra repayments, and that your honeymoon loan allows you to make additional repayments fee free and uncapped.
